- Financial Accounting is considered to be the father of accounting systems.

But
it has its own limitations.

LIMITATIONS ????
a) It provides past data.
b) It does not show the profit/loss of each product, job, process etc.
c) It fails to control resources.
d) It does not measure organizational efficiency.
e) It does not provide adequate data for price fixation.
f) It does not provide data for comparison of cost.
g) It provides only limited information to management for decision making.
Due to the limitation of
financial accounting, a
new branch of
accounting developed
called COST
ACCOUNTING.
 COST
ACCOUNTANCY
is now known
as COST
ACCOUNTING

COSTING

COST ACCOUNTING

BUDGETARY CONTROL

COST CONTROL

COST AUDIT
 COST ACCOUNTING:-
The scope of any subject refers to the various areas of study
included in that subject. Cost Accounting has wider scope. It
includes the following.
1. Cost Recording :- Also known as cost book-keeping. This means recording of cost
transactions to various books. Later these transactions are posted into various ledgers
maintained under cost accounting system.
2. Cost Classification:- Before recording the cost, the costs are classified into various elements
like material, labour, expenses. They are again classified into direct and indirect.
3. Cost Ascertainment:- Here the costs are ascertained for various products, jobs and
processes.
4. Cost Allocation:- Here it means the distribution of costs to various departments or products
on pre-determined basis. It is the charging of specific costs to costs units or cost centers.
5. Cost Analysis:- It involves detailed investigation into the actual costs and comparing it with
the budgeted costs and finding out the deviations.
6. Cost Comparison:- This means comparing costs of different activities and products and cost
of same product or service over a period of time.
7. Cost Control:- It is the regulation of cost of products or operations. Techniques include
inventory control, standard costing etc.
8. Cost Audit:- It is the verification of cost accounts.
9. Cost Reporting:- This involves presentation of cost information to management for decision
making.
- To control and reduce wastages.
MERITS/IMPORTANCE/ADVANTAGES
OF COST ACCOUNTING

MANAGEMENT

EMPLOYEES

CREDITORS &
INVESTORS

GOVERNMENT

SOCIETY
 MANAGEMENT
- Through cost accounting, one can identify profitable and
unprofitable activities. This helps on eliminating
unprofitable activities.
- It helps the management in decision making.
- It helps to bring control on material, labour and other
expenses through various techniques.
- It helps the management to minimize loss and wastages.
- Helps the management to fix the selling price.
- It enables to ensure organizational efficiency.
- It helps in appraising the performance of each division,
department etc. on the basis of cost comparisons.
 EMPLOYEES
- Through cost accounting, incentive schemes and bonus plans are introduced.
This helps to give better wages to the employees.
- It helps to introduce good wage system.
- It helps in increasing productivity, profitability and prosperity of the firm/.
- It minimizes misunderstanding between workers and employers.

CREDITORS & INVESTORS

- It helps the creditors to find pout solvency, profitability and future growth of the
company.
- It helps the creditors to know whether the capital employed is effectively utilized or
not.
- It helps the creditors to understand about the credit worthiness and financial
stability of the firm.
- It helps in cost control.
 GOVERNMENT
- It helps the government in formulating policies relating to export, import, taxation,
wage fixation etc.
- It helps in preparing national plans and budgets.
- It helps in levying taxes
- It helps the government to run their public sector enterprises effectively.

SOCIETY
- Consumers get quality products at reasonable price.
- It brings stability by improving managerial and operating
efficiency.
- It improves the entire economy.
- It generate employment opportunities.
- It lacks uniformity. Different organizations prepare
cost records and reports in different methods and
forms.
- It just help in decision making. It does not offer
solutions to the problems.
- It is costly.
- Cost computed for one purpose might not be useful
for other purposes.
- It is not suitable for trading concerns. Not applicable
to small enterprises.
- Cost Accountancy is not accurate.
 METHODS OF COSTING
Methods of costing means the methods of finding costs. Different methods can be used
to find out the costs. The method to be used differ from industry to industry. There are
mainly two methods of costing namely JOB COSTING and PROCESS COSTING. The other
methods are variation of these two basic methods.

Here costs are collected and accumulated for each job or

work order separately. Here each job is different for the
other. It is suitable for printing work, repair shops,
machine tools, ship building, furniture making etc.

Batch costing is a special type of job costing. It is

used in factories where articles are
manufactured according to definite batches.
Used in industries like garments, packed food,
toys, cosmetics etc.
 A contract is a big job. It takes longer time to complete.
Costs are collected, accumulated and ascertained for
each contract separately. A separate account is
maintained for each contract. It is used in industries like
dams, buildings, roads etc.

Here costing is used to ascertain the cost of each stage.

Here each production stage is called a process. Here the
final product of one process becomes the raw material of
another process. The final product is obtained in the last
process. It is found in textile industry, chemical industry,
paper manufacturing etc.

Single/ Unit Costing is used when a company produces

only one production large number on continuous basis
in a single process. Here they find out the cost per unit
of output. It is also called output costing. It is used in
industries like mines, quarries, cement work, brick
works etc.
 This method is applied to the enterprises which are
engaged in rendering services such as transport
undertakings, railways, hospitals, hotels, cinema,
electricity. This method aims at ascertaining the costs of the
services rendered. It is also known as operating costing.

A manufacturing process can be divided

into smaller parts, each part is called an
operation. Operation costing finds the
costs of each part. Here costs are
calculated for each process instead of each
process. Used in industries like leather,
engineering goods etc.

When two or more methods of costing are applied in

respect to the same product, it is called multiple
costing. It is also called composite costing. This
method is used in industries where a large number of
components are separately produced and assembled
into a final product. E.g. Bicycle manufacturing
industry, produced through batch costing and then
unit costing is used to find the cost of one bicycle.
Types of techniques of costing

Variable Costing
Also known as Marginal Costing.
It is the process of charging only
variable cost to products,
operations and process.
 DIRECT COSTING
It is the process of charging all direct costs to products, services and
jobs. The indirect costs are excluded and written off against the
profit of the period in which they arrive.

DIFFERENTIAL COSTING
It is the technique of comparing costs of two alternatives
for the purpose of deciding which alternative is best.

UNIFORM COSTING
It is the use of same costing principles, practices and methods by
several undertakings for a common control or comparison of
costs.
 HISTORICAL COSTING
It is the ascertainment of costs after they have been
incurred.

STANDARD COSTING
It is a system of comparing the actual costs with standard
cost. Analyzing variances and taking remedial actions if
necessary.